Home loan interest rates, which have been rising in-line with the Euro Interbank Offered Rate (Euribor), are now at the most normal level for the last ten years, private banking strategist at SEB, Peeter Koppel, says. Interest rates will continue to rise and can stop only when they have reached the vicinity of four percent, he added.
"The current situation is more normal [than at any time in the previous ten years], since the price of money should depend on the price of risk, while the home-loan borrower does not now face a situation where the risk level is virtually zero. In other words, the current situation is clearly more normal than at any time in the last ten years," Koppel told morning radio show "Vikerhommik."
Despite the increase in home loan interest rates, from a technical point of view the situation is far from tragic, as the real interest that a person pays is what is important, he said. To derive this real interest rate, inflation needs to be deducted from the loan interest rate, which means that the real interest rate makes a loan cheaper for a person at all times (since there is seldom a zero rate of inflation – ed.).
"In the context of real interest rates, we are essentially at the lowest levels in history. The reasonable approach would be that when real interest rates are positive, the loan must be repaid, and when they are negative, it is reasonable to borrow," Koppel continued.
Koppel conceded that this is certainly a theoretical view, while the situation may be different for the regular person if their loan repayments increase sharply, due to the increase in interest.
Euribor may rise to nearly four percent
As for the rise in the Euribor, Koppel said the European Central Bank (ECB) raises its interest rate as a monetarist policy, precisely in order to to bring down inflation.
While for the last decade interest rates were kept at zero to stimulate the economy, now the attempt is being made to raise the price of money, to curb the sharply increased inflation, he added.
"In general, any rate of inflation above 5 percent tends to last a relatively long time. Also, various rules and formulas state that the ECB's target interest rate could be relatively close to inflation to get inflation under control. We have a central bank money price of 2.5 percent and inflation above 10 percent, which means that this gap is still very wide, and means that controlling inflation will be a long and painful process," Koppel said.
Inflation can also be expected to slow down soon, however, because it is measured in comparison to last year's level, so at some point it would be measured against prices that had already risen very strongly, Koppel noted.
"If we reach a eurozone rate of inflation of around four percent, then the ECB could calm down," Koppel adde.
Speaking more generally about raising interest rates, Koppel said that based on the past behavior of central banks, it can be said that this rise in interest rates will continue until some accident occurs and then interest rates will start to be lowered again. "What that accident would be, I can't say, but that's usually how it's gone," he said.
However, inflation must be brought under control in any case, he went on, as money is an instrument of trust in the economy, and if money becomes cheaper at such a pace, that trust will diminish.
"Second - when a home loan is granted, every person's ability to pay is examined, and an interest rate of up to 6 percent is taken into account. This makes the buffer quite large. I have not seen anyone forecasting a 6 percent Euribor; rather that it will remain at four percent," said Koppel .
The purchase of real estate can wait
Commenting on the situation on the real estate market as a whole, Koppel said that he agrees with the viewpoint that now is not a favorable time to buy real estate.
"When the price and availability of money falls, real estate prices also fall. We can see that the market has clearly calmed down during the autumn. Prices have not gone own, but the number of transactions has. When prices move on the level, then at some point they should go either up or down. Currently, the conditions for the the first of these don't seem to be present."
Koppel added that the situation that existed for ten years, whereby there was plenty of money and cheap rates of interest, has now changed. Lending standards have become a bit stricter - for example, the down payment required is higher, which means that the maximum loan to value remains smaller - and this is phenomenon already being seen in other parts of the world, especially in Europe. This all has the effect of not so much new money entering the real estate market.
Editor: Andrew Whyte, Mait Ots